HELOC-Heavy Credit Union Manages Risk

An executive at the $4.8 billion ESL Federal Credit Union said a stable local real estate market helps his credit union manage the risk associated with keeping roughly 45% of its loan portfolio in HELOCs.

Credit data firm TransUnion reported that some financial institutions face risks from borrowers who made advances on HELOCs during the housing boom. Borrowers are generally able to draw against the lines of credit for 10 years, followed by a pay down period. TransUnion theorized some borrowers would be unable to make the higher payments of the pay down and lack the equity to refinance the debt.

The Rochester, N.Y.-based ESL has roughly $1.1 billion of its loan portfolio in home equity loans with about $900 million in HELOC's. The credit lines have a 10-year draw and are paid down over 20 years. Their average balance is $35,000, the credit union said.

ESL President/COO Faheem Masood explained that Rochester’s long history of stable real estate prices means very few borrowers will be underwater on their homes or would face any sort of payment shock when the pay down period begins.

“We have seen very little speculation in real estate in the Rochester market,” Masood said, adding housing prices had risen about 3% during the 2005-2008 run up to the housing crisis and then increased about 1% more from 2008-2010 years. Since then, home prices have remained more or less the same, with small fluctuations either way, he said.

“This is a very traditional housing market,” Masood added. “The overwhelming majority of real estate owners live in their property and we build equity in our homes by paying down our mortgages.”

That means that if a HELOC borrower faced could not afford repayment, he or she would be able to refinance the loan with either the credit union or another lender, he said.

In addition, ESL borrowers pay back some of the HELCO principal even during the draw period, Masood said. Each month, borrowers pay the greater of either $100 or 17 basis points of the principal along with an interest payment.

As a result, the monthly payment on ESL’s best HELCO rate with the credit union’s average balance of $35,000 is roughly $156, he said. That figure will climb to a little more than $200 during the pay down period.